Transcript

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Interview published by: Paul Jason – PGRI Public Gaming Research Institute
PGRI Interview:
Mark Hagen, Category Manager – Lottery Services, 7-Eleven Inc.
In summary what I’d like our lottery partners to take away from this
interview is 3 main points:”
1. Your local sales associates can help us increase lottery sales by
making sure stores have the right games, well merchandised and
activated on the 1st
day
2. Let’s work together to continually improve the guest experience for
lottery at the store level.
3. Let’s find some synergies across the states that can improve the
accounting for the lottery category and introduce some efficiencies
that can benefit both 7-Eleven and lottery.
PGRI Introduction: 7-Eleven is the key customer account for lotteries for a few reasons.
One, they account for more lottery ticket sales than any other retailer in the US. Two, they
operate with the over-the-counter and sales-assisted model that we know produces the
best results for Lottery.
7-Eleven is the world's largest operator, franchisor, and licensor of convenience stores with
more than 52,300 outlets. This number of locations surpassed the previous record-
holder, McDonald's Corporation, in 2007. And the number of stores has been growing at a
double-digit rate. This is a world-class operation with a level of retailing sophistication that
sets them apart from other retailers. Let’s listen to what our biggest customer has to say
Paul Jason, Public Gaming: What do you see as the most important sales drivers for the
lottery business?
Mark Hagen: Scratch tickets are about 60% of our lottery sales and they are the part of the
lottery business over which we have the most control. We want to drive Scratch tickets
because these customers are our regular, habitual customer. The sales of Scratch tickets are
highly impacted by in-stocks, timely activation of new games and merchandising. We have
found that Lottery’s sales and customer service reps can play a key role in helping us stay in
stock on best-selling games, activating new games and with merchandising. Merchandising
goes well beyond just providing new POS materials. For example, most states have worked
with us in upgrading our in-counter merchandising units. Without exception, when we
make those upgrades we have seen double-digit increases in scratch ticket sales which pays
back the investment by the lottery in a matter of months. We work with 33 different state
lotteries, but unfortunately, there are some states that refuse to work with us on upgrading

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our in-counter merchandising. Not surprisingly, those are the states where we have our
lowest average lottery sales. We even did a 10-store test for one of those states that
resulted in a significant increase in scratch ticket sales by just upgrading the in-counter
merchandising unit to our recommended standards. I am hopeful that those results, which
the state doesn’t dispute, will allow us to move forward with a program to upgrade our in-
counter merchandising. With Lotteries making 25-30% margins, this initiative could be a
huge win for the lottery’s beneficiaries.
And you would contend that the evidence is solid that at least a 10% percent increase
would in fact be achieved?
M. Hagen: I’m saying the evidence is solid that the increase would be at least that much if
not more.
What are some other best practices that you’ve seen from your most successful lotteries?
M. Hagen: How often the lottery rep visits our stores is another key success factor. Some
states have their reps visit our stores every one to two weeks to talk to our sales associates
about activating new games and making sure everything is always properly stocked with the
right games and displayed and ready to sell. Other states have their reps visit the stores
once every three to four weeks. What we have found is that higher call frequency results in
higher sales. Stores in states with higher call frequency have better in-stocks, closer
adherence to plan-o-grams and faster activations of new games, all factors that help drive
our scratch ticket sales.
Can you elaborate on what exactly what a Lottery rep does to help the stores increase
scratch-ticket sales?
M. Hagen: It's really much more basic than that. The rep just tells the store managers
about new games that are coming out and makes sure that the franchisee orders it. And in
some states, we actually allow the Lottery rep to place the orders for the franchisees. They
also make sure the assortment of product is current and correct. And it doesn't hurt for the
Lottery rep to remind the franchisee about the new product that launches tomorrow, and to
make sure that the game is activated and available for sale on the first date.
Some states do an extraordinarily good job of that. We're at over 99 percent execution of
first-day activation in Florida. Maybe that’s why that state’s sales are increasing faster than
most. In other states, with a much lower call frequency, we're at about 60 percent
execution of first-day activation and their sales, at least on the 7-Eleven channel, reflect
that. That’s a lot of money being left on the table for lack of doing these simple, basic
support functions that absolutely drive sales. Of course, some of these functions could be
thought of as being our responsibility. That’s fine, but the states where our Lottery partner

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has a bigger-picture outlook and focus on how we can work together to achieve mutually
desirable outcomes – those states have much higher sales per store. And that’s a good
thing for all of us.
We talk about how innovation and technology is changing the world. But you seem to be
saying that the biggest impact can be made by better execution of simple, low-tech sales
and merchandising support functions.
M. Hagen: Absolutely. It’s not about big investments and long learning curves to
implement new technology. Retail is about execution – the basics of “blocking and
tackling.” The Instants Scratch business sales are purely a function of having the right games
stocked, properly displayed and activated on the first day. Lotteries that take the time to
work with us to make that happen are delivering a lot better results for the beneficiaries
they serve.
Lotteries insist that they sell more tickets with on-counter displays than in-counter
displays.
M. Hagen: I’m sure that’s true. I have no doubt that if I put scratch tickets on the sales
counter, I'd sell more scratch tickets. But that's not the point. The point is that we are
simply not going to do that. That's just strategically not where we're going. Given that, I
would respectfully submit that lottery organizations work with us on things that we do want
to do. We value our relationship with Lottery, we value the product and the role it has in
our product mix, the residual store traffic and sales that it drives. We have lots of ideas for
how to increase Lottery sales and excellent ways to display and promote the product. I’m
just asking that Lottery work with us on things that we can do, that we want to do and help
us optimize our lottery sales. We are committed to this category. We embrace the
philosophy that the lottery player needs personal service from store employees. We are not
relegating Lottery to self-serve vending machines like most of the other big chain stores do.
We are invested in the business model that we all know works the best, and that is to sell
lottery products over the counter with a sales associate providing that service. This is a
more expensive retail model than self-serve vending, but we are invested with Lottery in
optimizing this personal-service sales model.
Personalized service is the retail model of smaller independently owned c-stores. Big chain
stores tend to be going with more of the self-serve vending model. Thankfully, 7-Eleven
provides the same kind of shopping experience that the independents provide - the
personalized, sales associate-assisted, over-the-counter service. Maybe Lottery needs to
appreciate that 7-Eleven is in fact a sophisticated operation with its own set of procedures
and methods of operation.

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M. Hagen: I do think that may be part of the challenge. Independents may need a different
kind of service than we need, and we may require a different level of flexibility than the
independents require. It is a mistake to try to apply the same procedures to 7-Eleven as
might be applied to the thousands of independents. The thing is, there are probably
120,000 convenience stores in America, and we have 8,000 of them. 7-Eleven is by far the
largest player, and we are as committed as anyone to optimizing sales of lottery products.
So I would respectfully submit that it will benefit Lottery to do what they can to fully
capitalize on the potential that a productive working relationship will yield. Independents
may put displays on the counters and try to up-sell (ask for the order) lottery. We won’t.
But if we work together to capitalize on all the things that we can do, I guarantee we will sell
more lottery products.
It would seem that 7-Eleven is an untapped resource, representing the largest seller of
lottery products in the country. I wonder if the fact that your stores resemble an
independent c-store more than they do a giant Wal-Mart causes you to be treated more
like an independent than the 8,000-store powerhouse that you actually are.
M. Hagen: I would say that we do expect to be treated with at least the same respect that
other large chain retailers, like Walmart, are treated. For many suppliers 7-Eleven is their
largest customer, and we are accustomed to being treated that way. It is a big mistake and
a huge missed opportunity when a supplier does not recognize our collective buying power.
What we decide to do can be rolled out to over 8,000 stores, which adds up to a lot of sales.
And our personalized clerk-assisted selling model aligns with Lottery in ways that the other
big-chain stores are not likely to do.
Additionally, 7-Eleven is on quite the exciting growth curve.
M. Hagen: Our store base has grown by 2,000 stores just over the last three years. That’s
25 %, and we expect the growth to continue.
Isn’t the entire c-store sector moving towards consolidation? And so the things that
Lottery needs to do to meet your needs are really no different from what they will need to
do anyway to meet the needs of larger and larger chain store operations.
M. Hagen: That’s very true. 7-Eleven just happens to be one of the most progressive of all
the c-store operators. Lottery can learn a lot from working with us to create new avenues
for cooperation. We are pleased to work with Lottery, share ideas for ways to improve the
business, forge new initiatives that will help Lottery grow. And, yes, I would suspect that
Lottery will get lots of fresh ideas that could be introduced in some fashion in other c-
stores. And the challenges of meeting our needs for better and more organized
performance data will be well worth the trouble because other large chain store operations
will require the same thing.

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You just referred to the need for data and reporting that is more organized, formatted in
ways that our usable by you, and standardized across all states. There are limitations to
the ability to standardize for the simple reason that lotteries all sell different products. So
we all get that Lottery can’t do everything that is desirable on this front. But is lottery
doing everything they can to make their reporting as useful to you as possible?
M. Hagen: We talked about this at the PGRI conference in November. 7-Eleven sells lottery
products in 33 different states, and we have 16 accountants that have to manage the data
we get from lotteries in 33 different formats. I’d like to think that we can do better than
that. I understand there may be limitations to what can be done, but I’d like to think that if
we work together we can develop a more standardized approach for reporting lottery sales
to retailers that is ultimately more efficient for us and more efficient for the lotteries. It will
take a concerted effort on the part of all the states to produce a more organized system for
reporting sales data and all I’m asking for is that we start the dialog. Lottery is not the only
category where we have multiple suppliers. The CPG products throughout our stores come
from thousands of different companies but for the most part they provide sales/invoice data
in a consistent format. All I am really asking for is recognition of the problem and a more
proactive approach from more state lotteries. To get started, all we would need is eight or
10 lotteries to work with us to figure out how to standardize the reporting in a fashion that
meets the needs of all of them. We know how this is done because we work with all the
CPG companies to do it. So we could help Lottery do this. We want to help Lottery to do it.
Switching gears, what is the average daily commission per store from lottery for 7-Eleven?
M. Hagen: I can’t share specific numbers but I can tell you that our daily commissions, while
they vary widely by state, are a meaningful number for us. In addition when Powerball or
Mega Millions-jackpots get over $300MM, that number can go up significantly. When that
happens we also benefit from all those additional lottery-ticket guests who buy more than
just lottery when they visit our store.
The lottery category is already one of our top 10 traffic drivers. When the jackpot gets over
a certain threshold, the number of lottery customers can increase dramatically. While those
guests may be coming to the store primarily to buy a Powerball or Mega Millions ticket,
roughly half of them also buy something else which helps our total sales.
In fact, one of the things that the lottery could do to help us is have more $300MM plus
jackpots, we should all be so lucky. While we may not be able to control the jackpot, one
thing we can control is doing a better job of capitalizing on the increased traffic that large
jackpots generate.
One of the things I would like to see us work on is how to quickly execute some cross-
promotions with Lottery during those high jackpot times. There is no way we can ship a

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physical coupon to 8,000 stores quickly enough to take advantage of a large jackpot.
However, with the lottery’s help we might be able to use the lotto terminal to print out a
coupon during high jackpot periods.
Our goal is to give the incremental lottery customer a coupon to bring them back into the
store the next day or the next week. That would be huge for us. There is no reason it can’t
be done if we work together to make it happen.